Cisco meets targets, but warns on outlook

Revenue forecast below expectations after order slowdown in January

By

DanGallagher

SAN FRANCISCO (MarketWatch) -- Cisco Systems Inc. managed to grow its earnings by 11% in the January quarter thanks to solid sales growth, but the company's shares took a hit in after-hours trading after the networking giant issued a disappointing forecast for the current period.

The results are likely to give further rise to fears that an economic slowdown could hit the high-tech sector, which led many other industries in earnings growth last year.

It is the second consecutive period in which Cisco's
CSCO, +0.37%
forecast could weigh on the market. In the company's last quarterly report in November, cautious comments from CEO John Chambers about the high-tech environment led to a sharp selloff that has clipped the company's shares by 30% and helped build negative sentiment around technology stocks, leading the Nasdaq to give up all of its gains made in the last year.

This time around, Chambers tried to sound a more optimistic note, saying he expects the slowdown will likely last "a few months," at least among corporate customers buying high-tech gear.

"I'm personally very optimistic that this market transition provides opportunities for us and will be relatively short-term in is implications," Chambers said on the call, adding that the company planned to use the slowdown as an opportunity "to be aggressive about moving into new market adjacencies," implying a potential upswing in acquisition activity.

However, a sharp slowdown in orders during the month of January led the company to issue a cautious outlook for the current quarter, which ends in April.

Chambers said he expects revenue for the April quarter to grow 10% from the previous year. That equates to revenue of about $9.8 billion, lower than the $10.19 billion expected by analysts for the period, according to Thomson Financial.

Shares of Cisco fell more than 8% in after-hours trading Wednesday following the report. The stock peaked above the $34 mark in early November before the last earnings report.

Earnings on target for second quarter

For the period ended Jan. 26, Cisco reported net income of $2.1 billion, or 33 cents per share, compared with net income of $1.9 billion, or 31 cents per share, for the same period last year.

On a pro-forma basis, the company said it would have earned $2.4 billion, or 38 cents per share, for the recent quarter - meeting estimates set by Wall Street analysts, according to Thomson Financial.

Cisco reported cash and equivalents of $22.7 billion by the end of the quarter. The company said it repurchased about $4 billion worth of stock during the period.

The company's legacy switching unit remains its largest business, with revenue totaling $3.3 billion, or about 34% of the quarter's total. Revenue from the Advanced Technology unit - which includes businesses that range from cable-TV set-top boxes to video conferencing products - totaled $2.4 billion, or 25% of the total while revenue from the Router business came in at just under $2 billion.

Revenue from the U.S. and Canada slipped about 4.5% from the previous quarter while revenue from emerging markets jumped more than 40%, tough the total accounted for just 12% of Cisco's total revenue base.

Street surprised by forecast

Leading up to the report, several analysts predicted that Cisco would adopt a cautious outlook for the quarter, given the current environment.

However, the guidance surprised even those who were already cool towards the stock.

"We were cautious going into the call, but they even surprised us," said Sam Wilson of JMP Securities, who currently has a neutral rating on Cisco's shares. "It's about $450 million they're taking out of the quarter. We knew January was weak; we didn't think it was that weak."

Wilson added that he believes Chambers is being too optimistic in expecting the current slowdown to be short-term in nature.

"We believe that we are at the front of a slowdown," he said.

Shaw Wu of American Technology Research, who rates Cisco as a buy, took a more bullish view, saying that Chambers was right to "reset the bar." But he conceded that the company's forecast was worse than many hoped for.

"I think investors were expecting some sort of guide down, but I think this was lower than expected," he said.

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